Oil Giants Cannot Avoid MTBE Insurance Double-Dipping Suit

A New York federal judge has ruled that BP PLC, Chevron Corp. and other oil giants can’t avoid facing Pennsylvania’s suit alleging they hid oil spill-related insurance proceeds to double-dip in a government-run pollution indemnification fund. U.S. District Judge Shira A. Scheindlin issued a mixed ruling allowing Pennsylvania to continue the suit alleging that refiners owe millions of dollars that the State has paid out to indemnify cleanup efforts related to leaks of underground storage tanks containing gasoline tainted with methyl tertiary-butyl ether (MTBE), a controversial additive that was phased out in the commonwealth in 2005.

Though Judge Scheindlin granted the dozens of companies — also including Kinder Morgan Inc., Phillips 66 Co., Texaco and others — their motions to dismiss Pennsylvania’s subrogation claims and Storage Tank and Spill Protection Act claims, she allowed the state’s unjust enrichment claims to stay in the case. She said in her order:

The commonwealth has alleged — consistent with Pennsylvania law — that the insurance defendants obtained a double-recovery by receiving money from both the [Underground Storage Tank Indemnification Fund] fund and their insurance companies covering the same releases,…If true, this would be a textbook example of unjust enrichment.

The suit, originally filed in the Philadelphia County Common Pleas Court by State Attorney General Kathleen Kane and Gov. Tom Corbett’s general counsel James Schultz, is an attempt to claw back payments disbursed by Pennsylvania’s Underground Storage Tank Indemnification Fund (USTIF) — the commonwealth’s MTBE insurer of last resort — to dozens of companies that used the funds to clean up spills of both regular and MTBE-tainted gasoline.

According to the complaint, all of the defendants were previously liable to third parties for releases of oil-related chemicals and turned to the USTIF for relief. But it appears that the companies were covered by commercial, captive and mutual insurance policies for those same corrective actions. If so, they were clearly prohibited from “double-dipping” into the fund.

More than 20 companies filed the motion in December to sever, remand or dismiss several of the insurance-related claims in the suit. The claims included subrogation, unjust enrichment and claims under the Storage Tank and Spill Protection Act. In her opinion, Judge Scheindlin said that Pennsylvania had not adequately pled the first and last of those claims, but that she would allow the state to pursue claims of unjust enrichment. She wrote:

The anti-subrogation rule prohibits an insurer from bringing a subrogation claim against its own insureds,….Here, the commonwealth is the insurer, and the insurance defendants are the insured.

Similarly, Judge Scheindlin said in the opinion that the claims under the storage tank act were not adequately pled. Under the law, the state must show that the insureds — in this case, the oil refiners — purposefully hid information that was requested by the state. In that regard the Judge said:

Nothing in the complaint supports the notion that it is plausible that the insurance defendants concealed the existence of additional insurance in response to a request by the fund.

A number of other state and municipal governments across the country — most recently Vermont — have sued energy companies to cover environmental testing and cleanup costs stemming from MTBE contamination. MTBE was used in U.S. gasoline at low levels since 1979 to replace lead as an octane enhancer, which helps prevent the engine from “knocking,” according to the Environmental Protection Agency (EPA). Since 1992, it has been used at higher concentrations in some gasoline to fulfill the oxygenate requirements set by Congress in the 1990 Clean Air Act Amendments.